THE WORLD BANK
Private and Financial Sector Development Department
Europe and Central Asia Region
Washington, DC

ii

This Diagnostic Review is a product of the staff of the International Bank for
Reconstruction and Development/The World Bank. The findings, interpretations, and
conclusions expressed herein do not necessarily reflect the views of the Executive
Directors of the World Bank or the governments they represent.

Foreword
Consumer protection in financial services lies at the heart of any financial sector that is
efficient, competitive and fair. Three areas are important. Customers of financial
institutions should have the right to receive information that is clear, complete, accurate
and comprehensible before they decide to borrow or to invest. They should have access
to recourse mechanisms that are efficient and cost-effective. They should also be able to
obtain sufficient financial education to understand the terms and conditions and other
information provided to them as financial consumers.
We are pleased to provide this pilot Diagnostic Review of Consumer Protection and
Financial Capability in Bulgaria and thank the Bulgarian authorities for their valuable
cooperation and collaboration in its preparation. The Review not only looks at financial
services in Bulgaria but also refines a set of good practices or benchmarks for use in
reviewing consumer protection in financial services in any jurisdiction. It is expected that
this work will prove helpful to the international community and those in emerging
markets who seek to establish common ground for minimum good practices in consumer
protection in financial services.

v

Acknowledgments
This review was prepared by a team led by Sue Rutledge, Regional Corporate
Governance/ Consumer Protection Coordinator and Senior Private Sector Development
Specialist, World Bank. The project team consisted of Brett Coleman (Senior Financial
Sector Specialist), Evgeni Evgeniev (Private Sector Development Specialist), Martin
Melecky (Financial Economist), Rodolfo Wehrhahn (Senior Insurance Specialist),
Richard Symonds (former Senior Counsel), Juan Carlos Izaguirre Araujo (Consultant)
and Bujana Perolli (Consultant). All are of the World Bank. The Bulgarian version of this
report was made possible thanks to the translation of Simeon Enchev.
The report was prepared under the general guidance of Orsalia Kalantzopoulos (Country
Director for Bulgaria) and Fernando Montes-Negret (Director of the Finance and Private
Sector Development Department of the European and Central Asia Region). Florian
Fichtl (Country Manager for Bulgaria) provided detailed comments and strategic
guidance to the team.
Peer review comments were received from TomĂĄĹĄ Prouza, former Deputy Finance
Minister of the Czech Republic, and Antony Randle, Consultant of the World Bank.
Helpful comments and advice were also provided by the Ministry of Finance, Ministry of
Economy and Energy, Bulgarian National Bank, Financial Supervision Commission and
the Consumer Protection Commission. The authors of this report are grateful to all for
their contributions.

vi

Executive Summary
The global financial crisis has highlighted the importance of consumer protection
and financial capability as medium-term measures supporting financial sector
development. In addition to short term measures to mitigate economic impacts,
policymakers are taking steps to build better foundations for future development of the
financial systems through improved regulatory reforms. These medium-term measures
involve enhanced financial prudential regulation and oversight, financial sector
governance (including governance of financial regulators and supervisors), business
conduct regulation and supervision, and financial consumer protection. The latter
receives an increasing emphasis not only in developed countries but also in emerging
market economies, as most of the risk exposures associated with the latest credit boom
period were assumed primarily by households.
Financial consumer protection improves efficiency of financial intermediation—and
indirectly reduces risks to financial stability. At its heart, consumer protection
addresses power, information, and resource imbalances which place consumers at a
disadvantage vis-à-vis financial institutions. Financial institutions are very familiar with
the terms and conditions of their financial products and their risk characteristics. Retail
consumers may find it difficult or costly to obtain sufficient information on their financial
purchases or understand complex financial products even when relevant information is
disclosed. Consumers who are empowered with information and basic rights—and who
are aware of their responsibilities—provide an important source of market discipline to
the financial sector, encouraging financial institutions to compete on the basis of useful
products and services. In addition, financial consumer protection builds trust in financial
systems and helps broaden and diversify the depositors’ base. Such public confidence
indirectly reduces the liquidity risk of the banking sector.
Consumer protection is gaining increasing importance at both the EU and
Bulgarian level. The EU Consumer Policy strategy of 2007-13 sets three objectives to:
(i) empower consumers by ensuring that they have real choices, accurate information,
market transparency, and the confidence that comes from effective protection and solid
rights; (ii) enhance consumers' welfare regarding price, choice, quality, diversity,
affordability and safety of products; and (iii) protect consumers as a group from the
serious risks and threats that cannot be withstood on an individual basis. An October
2008 report of the European Parliament also identified measures to be taken to improve
financial education throughout the EU.
Consumer protection legislation and institutions have been put in place in Bulgaria.
Consumer protection is firmly based in Bulgarian law in both the Constitution and the
Consumer Protection Act. The Act establishes the Consumer Protection Commission
(CPC) within the Ministry of Economy and Energy. In addition, the National Consumer
Protection Council, involving representatives of the government and consumer protection
associations, was set up to advise the Minister of Economy and Energy on policy strategy
concerning consumer protection. The Consumer Policy Strategy for 2004-07 set three
goals: (i) establishment of a high level of consumer protection, (ii) effective enforcement
1

of the legislation and (iii) promotion of the activity of consumer protection associations.
The Consumer Policy Strategy for 2010-2013 is under preparation.
Bulgarian legislation has transposed the key EU Directives related to consumer
protection in financial services and more revisions are being implemented. The 2007
revisions to the Consumer Protection Act transposed EU Directives related to financial
consumer protection. The Directives on Consumer Credit, Distance Selling and Unfair
Commercial Practices have also been transposed into Bulgarian law. At the same time,
changes to the securities legislation incorporated the Directive on Markets in Financial
Instruments (MiFID) while revisions to insurance legislation transposed the Directives on
Life Insurance and Insurance Mediation. The Payment Service Directive was transposed
into Bulgarian law. Revisions to the Law on Credit Institutions bring leasing and
consumer finance companies under supervision of the Bulgarian National Bank (BNB).
The Central Credit Register, held by the BNB and consisting of outstanding consumer
and mortgage loans by banks, has been expanded to include reporting from all credit
providers.
Use of consumer financial services has been increasing in Bulgaria. Between 2003
and 2007, household borrowings increased from 7 to 24 percent of GDP. In addition, a
survey conducted in September 2008 by the market research institute, GfK Bulgaria,
found that one-third of Bulgarian consumers hold a debit card while about 9 percent have
credit cards. The use of bank cards has significantly increased relative to January 2005,
when GfK Bulgaria showed that only 20 percent held debit cards and 2 percent used
credit cards. Saving products appear to be less widespread than bank cards since only 12
percent own a saving product of one form or another.
At the same time, consumers complain about the practices of financial institutions.
About 1,200 complaints and disputes were presented to the authorities in 2008. The
Financial Supervision Commission (FSC) reported 791 complaints related to insurance
products. For banking services about 100 complaints were submitted to the BNB and
another 80 to the CPC. Detail is not provided on the nature of the complaints. However,
some anecdotal information is provided by the financial guide Moite Pari
(www.moitepari.bg), which indicates that consumers have complained that: (1) financial
institutions can change their lending or deposit rates without notice to customers and
without clear explanation of the changes; (2) important details of the terms and
conditions of financial products are contained in contracts that are difficult for consumers
to understand; (3) personnel of financial institutions are unable to explain to customers
their financial products; (4) consumers have difficulty obtaining information in a format
that allows them to compare offers by different institutions; (5) consumers do not receive
monthly statements from financial institutions; and (6) in case of disputes over entries in
credit register, consumers have difficulty obtaining correction of errors.
In addition, the October 2008 Eurobarometer survey of consumer protection in 27
EU Member States indicated that Bulgarian consumers need a strengthened
consumer protection framework for all sectors, including financial services. Twothirds (64 percent) of Bulgarian consumers disagreed that they were adequately protected

2

by existing measures to protect consumers, while among the EU just over one-third (39
percent) were similarly critical. When trying to decide what to do when a complaint was
not satisfactorily resolved, 22 percent of Bulgarian consumers (but only 14 percent in the
EU) went to a consumer association or consumer help desk for assistance. However more
than three-quarters gave up. 78 percent of dissatisfied consumers in Bulgaria took no
further action (vs. only 51 percent among the EU).
Clearer and more transparent rules—with effective enforcement mechanisms—are
needed to further strengthen Bulgarian financial consumer protection framework
and practices. Clear rules not only help ensure that financial institutions maintain high
standards in their treatment of retail customers, but also help consumers understand their
legal rights—and responsibilities—as purchasers of financial services and products.
Financial education will help consumers understand their legal rights, but such rights
must first be clearly articulated in laws, regulations and codes of conduct. While much
improvement has been made in Bulgaria’s legal and regulatory framework for financial
consumer protection, there are still some gaps that create loopholes and undermine the
effectiveness of supervisory agencies in improving consumer protection. For example,
whereas the rules on consumer disclosure for consumer credits are extensive, those for
residential mortgages remain minimal.
Measures to improve consumer protection and financial capability should be
pragmatic and effective—and empower consumers. The Review recommends five
main measures:
A) Strengthen the institutional structure supporting financial consumer
protection,
B) Improve the rules related to quality and user-friendliness of consumer
disclosure,
C) Strengthen the rules that govern the business practices of financial institutions
vis-à-vis consumers,
D) Improve the mechanisms to address consumer complaints and disputes, and
E) Expand the access of consumers to useful and timely financial education.
A)

Institutional Structure

A clear structure for consumer protection in financial services is needed. Under the
current structure, several agencies are responsible for addressing problems for financial
consumers. For consumer credit and retail payments, consumers must approach the CPC
for help, but for insurance, securities, investment funds and pensions, consumers should
go to the FSC. However problems with credit registers should be presented to the
Commission for Personal Data Protection. In cases where the law does not explicitly
mention a competent authority, such as residential mortgages or personal leases (which
are not considered to be consumer credits), CPC is the responsible authority for consumer
protection.
The institutional structure for financial consumer protection should be improved.
The current framework provides for clear responsibilities for the agencies responsible for
developing consumer policy and preparing consumer protection legislation. However less
3

clear are the responsibilities for enforcing financial consumer protection legislation and
for helping to resolve disputes with consumers on individual cases. To ensure effective
consumer protection in financial services, six functions are needed. They are to: (1)
resolve financial consumersâ&#x20AC;&#x2122; inquiries and complaints; (2) reconcile disputes; (3) gather,
publish and analyze data on consumer complaints; (4) submit consolidated reports of
consumer complaints and disputes to financial supervisors; (5) recommend measures to
improve consumer protection; (6) initiate and conduct other activities contributing to
effective and efficient financial consumer protection. All require both clear rules and
effective enforcement mechanisms. Responsibility for the six areas can be divided in
various ways.
For Bulgaria, three approaches for the institutional structure might be considered:
a) The CPC would be responsible for supervision of compliance with consumer
protection legislation for all financial services, not just consumer credits and
payments but also mortgages as well as leasing, insurance, securities investments,
private pension plans, and credit reporting. This would require substantial
capacity building within the CPC and establishment of a specialized department
for financial services with additional resources. Under this option, conciliation
committees should be established as permanent standing committees for each type
of financial service (along the lines of the Conciliation Committee for Payment
Disputes) and their operations should be improved. In the medium-to long-term,
the financial services department should be detached from the CPC as a separate
financial ombudsman office.
b) The financial supervisory agencies would be responsible for supervision of
compliance with consumer protection legislation for financial services. In this
case, the CPC would be responsible for resolving consumer disputes for no
financial services. Financial supervision would be provided by either the BNB or
FSC and extended to cover all institutions relevant for financial consumer
protection. This would require that the legal mandate of the BNB be revised to
include the additional responsibility of financial consumer protection. This is not
without difficulties. Combining prudential supervision with consumer protection
creates conflicts for supervisory agencies but may also provide useful insights
into financial stability issues arising from insufficient consumer protection.
c) A financial ombudsman would be established to handle all disputes, complaints
and inquiries related to consumer financial services, eventually replacing the role
of the conciliation committees. The financial ombudsman could be responsible for
consumer protection covering all six areas noted above. Alternatively, the
financial ombudsman could be limited to providing an alternative dispute
resolution mechanism outside the courts, as is currently done by the conciliation
committees.
The approaches are not mutually exclusive. For example, a financial ombudsman could
complement the work of either the CPC or the financial supervisory agencies.

4

The Diagnostic Review recommends the first option—that the CPC cover consumer
protection legislation for all financial services—as an interim solution, but with
consideration of a financial ombudsman as a long-term solution. Whatever solution is
chosen, substantial effort and resources will be needed to implement an effective
institutional structure. If the option of creating a financial ombudsman is selected, an
intermediate approach would be to start by establishing a financial ombudsman office
within the CPC and later considering spinning-off the office as a separate agency.
Consideration should also be given to whether the ombudsman should be under the
professional associations or set up as an independent authority established by law.
Again the issue is complex. The work of an ombudsman set up under a professional
association is facilitated by a voluntary agreement among the association members to
abide by the ombudsman's decisions, generally up to small awards. Such small amounts
are not generally large enough to be of concern to financial institutions and the
ombudsman can carefully review each case on its merits in order to ensure that
consumers feel that they have been treated fairly. International experience, for example in
Germany, suggests that a banking association ombudsman is an effective and efficient
approach to resolving consumer concerns over treatment by financial institutions. On the
other hand, an ombudsman set up by a banking association would not be able to cover
insurance or other financial services and more ombudsmen—one for each professional
association in the financial sector—would be needed. Also in some countries there is
concern that an ombudsman set up and funded by a professional association would be
beholden to the financial institutions that are members of the association—or would be
seen as such by the public. The Diagnostic Review recommends that careful
consideration of the advantages and disadvantages of each type of ombudsman be
conducted.
Consumer associations should play a strong role in consumer protection in
Bulgaria. Whatever option is selected, consumer associations should become strong
advocates of financial consumers through their greater participation in policy-making
concerning consumer protection. While increased financing support from the state budget
is recommended, consumer associations should also increase their transparency, improve
their accountability frameworks, and establish strong reporting links to policy makers.
B)

Consumer Disclosure

Consumer information should be improved. Where consumers can obtain clear and
comparable information, they can make informed choices and ensure that the financial
products that they purchase are suitable for their needs and objectives. Clear laws and
regulations—and effective enforcement mechanism—are needed to ensure meaningful
disclosure of consumer financial products. The Bulgarian legislation on consumer credit
requires clear simple information on key terms and conditions in consumer credit
contracts. However a Key Facts Statement for each type of standard retail financial
product would further help consumers understand the key terms and conditions of their
contracts, particularly for insurance and pensions, and compare the conditions of products
among different financial entities. It is recommended that the professional associations

5

develop standardized formats for a Key Facts Statement for each type of standard retail
product. The disclosure requirements for consumer credits should also be applied to
residential mortgages. Consumers should be able to obtain a copy of the full terms and
conditions of retail financial products before applying for a product. Investment returns
should be presented on a risk-adjusted basis with an indication of basic risk parameters.
Advertising for financial services should be closely monitored to ensure that it is not
misleading. Tariff surveys showing comparison pricing of financial products would be
helpful.
C)

Business Practices

Business practices need to be strengthened. The codes of ethics (conduct) prepared by
the professional associations should be widely disseminated and their implementation
regularly monitored by the CPC. All providers of consumer financial services should be
obliged to be registered and their business conduct should be subject to ,monitoring by a
financial supervisory agency. The insurance and pension companies should be liable for
the actions of their agents. Consideration should be given to the training and certification
of all sellers of financial services. Procedures for account handling should be improved. It
may be useful to apply "cooling-off" periods to longer-term financial products.
Consumers should be allowed to choose the provider of any product required for another
financial product. Use of a "mystery shopper" may also provide useful insights on
existing sales practices.
D)

Inquiries, Complaints and Disputes

Treatment of consumer complaints and disputes lies at the heart of financial
consumer protection. All financial institutions should be obliged to establish a clear
process for dealing with customer complaints and their timely resolution. In Bulgaria,
about 1,200 complaints and disputes about financial services were presented to the state
authorities in 2008â&#x20AC;&#x201D;but this may understate the actual number of complaints. The
statistics on the number and types of consumer complaints regarding financial services
should be consolidated, published and analyzed. Conciliation committees help in finding
an amicable solution for customer disputes. However the structure of conciliation
committees should be improved, using the Conciliation Commission for Payment
Disputes as a useful model. Consideration should be given to various mechanisms of
making the decisions of the conciliation committees binding on financial institutions for
small amounts of money. Bulgarian legislation allows for class-action lawsuits by
consumers and consumer associations, but their effectiveness in providing collective
redress should be monitored. It is recommended that Bulgaria joins FIN-NET, the
network of national out-of-court complaint schemes in the European Economic Area
countries that are responsible for handling disputes between consumers and financial
services providers.

6

E)

Financial Education

Bulgaria includes financial education as part of the consumer protection legislation
but consumer awareness remains extremely low. Some programs in Bulgaria are
underway but much more is needed. Preparing effective financial education programs is
not an easy task. A distinction should be made among three different types of programsâ&#x20AC;&#x201D;
financial education vs. information vs. advice. Financial education programs should be
carefully designed and rigorously evaluated and viewed as a long-term investment. A
baseline survey of financial capability should be used to identify vulnerable parts of the
Bulgarian population and design targeted financial education programs. Follow-up
surveys should be conducted every three to five years to evaluate the effectiveness of the
programs of financial education and consumer awareness.

7

Introduction
The Diagnostic Review of Consumer Protection and Financial Capability in
Bulgaria is the eighth report in a World Bank-sponsored pilot program to assess
consumer protection in financial services in developing and middle-income
countries.1 The objectives of this Review are three-fold to: (1) conduct a review of the
existing rules and practices in Bulgaria compared to international good practices on
consumer protection in financial services; (2) provide recommendations on ways to
improve consumer protection in financial services in Bulgaria; and (3) refine a set of
good practices prepared by the World Bank for assessing consumer protection in
financial services, including financial capability. The Diagnostic Review was prepared at
the request of Ministry of Finance with the valuable input of the Bulgarian National
Bank, the Financial Supervision Commission, the Ministry of Economy and Energy, the
Consumer Protection Commission and the Commission for the Protection of
Competition, other public entities, the Association of Banks in Bulgaria, consumer
associations and experts from the financial and legal community.
The good practices used in the Review were developed based on international
approaches in both developed and developing countries to effective and efficient
consumer protection in financial services. 2 A set of good practices was initially
assembled for the Slovakia Review and was subsequently revised for the Romania,
Croatia, Russia and Azerbaijan Reviews. The good practices incorporate the provisions
of the EU Directives related to consumer protection and the reports of European financial
regulatory and supervisory agencies as well as the laws, regulations and business practice
codes in the United States, Australia, Canada and other countries worldwide. The
Organization for Economic Cooperation and Development (OECD) has also released sets
of good practices for financial education and awareness on pensions and insurance3, and a
set of draft good practices for credit products, supplementing the recommendations
presented in its 2005 global review of financial education programs.4 While the good
practices are based on different countriesâ&#x20AC;&#x2122; international experience in financial consumer
protection, the good practices have not yet been tested as a set of benchmarks during a
global financial crisis. It is likely that the ongoing financial crisis will provide useful
insights to stimulate further revisions of the good practices. In the interim, the good
practices provide a useful tool for conducting systematic assessments of a countryâ&#x20AC;&#x2122;s legal
and regulatory framework for financial consumer protection.
1

In chronological order, other reports on consumer protection in financial services have been prepared for
the Czech Republic, Slovakia, Azerbaijan, Romania, Croatia, Russia and Lithuania. The set of published
final
reports
on
financial
consumer
protection
can
be
downloaded
at
http://www.worldbank.org/eca/consumerprotection.
2
The World Bank has released the document Good Practices for Consumer Protection and Financial
Literacy in Europe and Central Asia: A Diagnostic Tool as a Consultative Draft. A copy can be
downloaded at http://www.worldbank.org/eca/consumerprotection.
3
See OECD, Improving Financial Education and Awareness on Insurance and Private Pensions (2008)
available at http://www.oecd.org/document/8/0,3343,en_2649_34851_41210376_1_1_1_1,00.html.
4
See OECD, Improving Financial Literacy: Analysis of Issues and Policies (2005), available at
http://www.oecd.org/document/28/0,2340,en_2649_201185_35802524_1_1_1_1,00.html.
7

The publication of the Diagnostic Review for Bulgaria aims to enhance development
of financial consumer protection both in Bulgaria and worldwide. In particular, it is
anticipated that application of the good practices in middle-income countries, such as
Bulgaria, will contribute to international policy dialogue on the key components of
financial consumer protection and assist in the development of benchmarks that are
widely accepted as generally applicable to consumer protection in financial services in
any jurisdiction.
The Review is presented in two volumes. Volume I notes the importance of consumer
protection in financial services, provides statistics on the size and growth of the retail
financial sector in Bulgaria, describes the Government's policy strategy for financial
consumer protection, and sets out the key findings and recommendations of the Review.
Volume II provides an assessment of the Bulgarian consumer protection framework and
practices against the benchmark of good practices for five segments of the financial
sectorâ&#x20AC;&#x201D;banking, non-banking credit institutions, securities, insurance and private
pensions. In addition, analysis of consumer protection and financial capability issues for
the credit reporting system is provided. Annex 1 to Volume II provides a list of the key
laws and institutions for consumer protection in Bulgaria.

Importance of Consumer Protection & Financial Capability
The global financial crisis has highlighted the importance of consumer protection
and financial capability as medium-term measures supporting financial sector
development. In addition to short term measures to mitigate economic impacts,
policymakers are taking steps to build better foundations for future development of the
financial systems through improved regulatory reforms. These medium-term measures
involve enhanced financial prudential regulation and oversight, financial sector
governance (including governance of financial regulators and supervisors), business
conduct regulation and supervision, and financial consumer protection. The latter
receives an increasing emphasis not only in developed countries but also in emerging
market economies, as most of the risk exposures associated with the latest credit boom
period were assumed primarily by households.
Each year the global economy adds an estimated 150 million new consumers in
financial services. Most are in developing countries, where consumer protection and
financial literacy are still in their infancy. Particularly in the countries that have moved
from state planning to market economies, protecting the interests of consumers has
become an important component of sound and competitive financial markets.
Weak consumer protection and financial capability affect both developed and
developing countries. Emerging countries worldwide have seen rapid development of
their financial sectors over the last ten years and rapid growth of income has provided
consumers with more resources to invest. Increased competition among financial firms,
combined with improvements in their technology and infrastructure, has resulted in
highly complex financial products sold to the public. However, the public in many
emerging markets (particularly the post-transition countries of Europe and Central Asia)
lacks a history of using sophisticated financial products. Even in well-developed markets,
8

weak consumer protection and financial literacy can render households vulnerable to
unfair and abusive practices by financial institutions—as well as financial frauds and
scams.
At its heart, the need for consumer protection arises from an imbalance of power,
information and resources between consumers and their financial service providers,
placing consumers at a disadvantage. Consumer protection aims to address this market
failure. Financial institutions know their products well but individual retail consumers
may find it difficult or costly to obtain sufficient information on their financial purchases.
Personal insurance, such as auto or life insurance, are often cited as examples of the
imbalances. The complex contracts prepared by insurers—and the risk allocation between
the consumer and the financial institution—are often beyond the capacity of most
consumers to understand. A well-designed consumer protection framework can help
reduce the imbalances of power and information between consumers and financial
institutions.
Consumer protection and financial capability promote efficiency and transparency
of retail financial markets. Consumer protection attempts to redress the imbalances
between retail consumers and financial service providers, giving individuals clear and
complete information on which to make informed decisions and by prohibiting financial
institutions from engaging in unfair or deceptive practices. Consumers who are
empowered with information and basic rights—and who are aware of their
responsibilities—provide an important source of market discipline to the financial sector,
encouraging financial institutions to compete by offering better products and services
rather than by taking advantage of poorly informed consumers. Financial capability helps
consumers understand the information and make risk/return choices that optimize their
financial wealth. Consumer protection also improves governance of financial institutions.
By strengthening transparency in the delivery of financial services and accountability,
consumer protection also helps promote good governance in the financial sector.
Strong consumer protection can also have an indirect impact in reducing financial
risks, contributing to financial stability. Both consumer protection and financial
capability are needed to build trust in financial systems and thus broaden and diversify
the deposit base. This, in turn, reduces liquidity risk of the banking sector. Empowered
consumers also help foster financial stability by protecting themselves from incurring
large exposures to market risks. This increases transparency of the credit risk assumed by
the financial system and lowers the related monitoring costs for outsiders, including
financial supervisors.
In addition, consumer protection helps financial firms in facing the specific risks
that arise in dealing with retail customers. In its April 2008 report, the Joint Forum of
the Basel Committee on Banking Supervision, the International Organization of
Securities Commission and the International Association of Insurance Supervisors
identifies three key risks related to possible "mis-selling" financial products to retail

9

customers. 5 They are: (1) legal risk, if successful lawsuits from collective action by
customers or enforcement actions by supervisory agencies result in obligations to pay
financial compensation or fines; (2) short-term liquidity risk and long-term solvency risk,
if retail customers are treated unfairly and thus shun the financial institution and
withdraw their business; and (3) contagion risk, if the problems of one financial
institution (or type of financial product) spread across the financial sector. Effective
consumer protection can help ensure that the actions of financial firms do not make them
subject to criticisms of mis-selling.
Consumer protection could also shield the financial sector from the risk of political
over-reaction in periods of financial turmoil. The political response to collapses of
parts of the financial sector may be to over-compensate with heavy regulation. The
impact of too little consumer protection became evident, for example, during the
insurance and superannuation scandals in the United Kingdom and Australia. The result
of the scandals was seen in extensive studies on recommendations for wide-ranging
regulatory reform.
Financial consumer protection has two modes of delivery: (1) regulation, and (2)
financial education. Some substitution is possible. For example, in developed markets
with informed consumers, financial education can empower consumers to demand clear
and comparable information and seek redress over disputes. However in most markets,
financial education alone is not sufficient and some regulation is needed. The reasons are
three-fold: (1) financial education will always lag behind the development of financial
markets, (2) the direct (immediate) costs of implementing financial education programs
are relatively high compared to regulation, and (3) the existing governance structure
(incentives) of financial markets does not support adequate market discipline.
However regulation also imposes a cost on the financial sector. Regulation can impair
both competition and innovation in the financial sector, thus raise consumer costs and
obstruct development of adequate market discipline that would hold risk-taking in check.
Clear priorities need to be set. Regulation should be subject to cost-benefit analysis and
consumer protection regulations should be assessed to determine their impact on sound
consumer finance.6
An effective and efficient consumer protection framework should provide
consumers with:
ď&#x201A;ˇ

Transparency by providing full, plain, adequate and comparable information
about the prices, terms and conditions (and inherent risks) of financial products
and services;

5

Joint Forum of the Basel Committee on Banking Supervision, the International Organization of Securities
Commission and the International Association of Insurance Supervisors, Customer suitability in the retail
sale of financial products and services, April 2008.
6
Bulgarian legislation on consumer protection issues is mainly driven by the application of EU Directives.
The recent Directives have maximum harmonization character, which means that Member States are
obliged to establish the level of protection set out in the Directive and they are not allowed to go further
than that level.
10






Choice by ensuring fair, non-coercive and reasonable practices in the selling of
financial products and services and collection of payments;
Redress by providing inexpensive and speedy mechanisms to address complaints
and resolve disputes; and
Privacy by ensuring control over access to personal financial information.
Access to financial education that enables consumers develop the financial
capability required to understand the risks/return (cost) trade-offs, and their rights
and obligations regarding the financial products and services that they buy.7

Bulgarian Policy for Consumer Protection in Financial Services
in the EU Context
The EU Consumer Policy strategy 2007-2013 aims to strengthen consumer
protection and financial literacy.8 The strategy has three objectives to: (1) empower
consumers by ensuring that they have real choices, accurate information, market
transparency, and the confidence that comes from effective protection and solid rights;
(2) enhance consumers' welfare regarding price, choice, quality, diversity, affordability
and safety of products; and (3) protect consumers as a group from the serious risks and
threats that cannot be withstood on an individual basis. Key steps for the implementation
of the strategy involve development of benchmarks for national consumer policies,
including a consumer protection policy for the financial sector, and collection of service
quality data and complaint statistics. The EU takes the approach that an effective regime
of financial consumer protection covers three areas. Consumers should have access to:
(1) sufficient information to make informed decisions in the purchase of financial
services, (2) cost-effective recourse mechanisms to redress violations of the financial
service contract, and (3) programs of financial education.
Financial education is being emphasized in the program under development in the
EU. In November 2007, the European Commission (EC) released its survey of over 150
financial education programs conducted in the 27 Member States. An October 2008
report of the European Parliament identified six measures to be taken to improve
financial education throughout the EU.9 They are:
1) A basic program in financial education should be developed at the EU level to set
common rules and principles to be applied in Member States;
2) The Commission should recommend that Member States include financial
education in their national school curricula;
3) Special targeted approaches should be developed for school children, college
students, adults, low-income households and pensioners;

7

Financial education is also needed to help households in making long-term financial decisions, such as
savings for retirement or sending children to college. However such "life-cycle" planning is beyond the
direct scope of consumer protection in financial services.
8
EU Consumer Policy Strategy 2007-2013 COM (2007) 99 final. http://ec.europa.eu/consumers/
overview/cons_policy/EN%2099.pdf.
9
European Parliament Report on protecting the consumer: improving consumer education and awareness
of credit and finance (2007/2288(INI))
http://www.europarl.europa.eu/sides/getDoc.do?language=EN&reference=A6-0393/2008.
11

4) Member States should develop networks of financial education, with participation
of government and non-government agencies, as well as specially trained tutors;
5) The Commission should encourage Member States to establish special programs
for pensioners and consumers at the end of their professional careers; and
6) The Commission should create a budget for financial education programs at the
EU level, covering media campaigns to increase consumer awareness of the
problems created by low financial literacy.
In its Communication on Financial Education the Commission noted it would conduct a
comprehensive review in 2010 to evaluate the effectiveness of existing programs of
financial education among Member States. 10
In Bulgaria, consumer protection is also firmly based in the law. Consumer protection
is firmly enshrined in the Constitution of the Republic of Bulgaria. Article 19 of the
Constitution adopted on July 12, 1991 says that “the state shall establish and guarantee
equal legal conditions for economic activity to all citizens and corporate entities by
preventing any abuse of a monopoly status and unfair competition and by protecting the
consumer.” In addition, the Consumer Protection Act specifies eight consumer rights.
They are the right to:
 Be informed about products and services;
 Be protected against products and services that are hazardous to consumers' life,
health or property;
 Protection of economic interests with regard to unfair commercial practices and
methods of sale, unfair contractual terms, and provision of guarantees associated with
consumer goods;
 Obtain redress for damage caused by defective products;
 Access judicial and out-of-court procedures for the resolution of consumer disputes;
 Education on issues related to consumer protection;
 Association for the purposes of protecting consumers' interests; and
 Be represented before State bodies making decisions on issues affecting consumers.
The initial legislation created consumer protection institutions. The initial consumer
protection legislation was approved as early as 1999 and it established the Consumer
Protection Commission as a legal entity within the Ministry of Economy. At the same
time, the National Consumer Protection Council was set up to advise the Minister of
Economy on strategic policies on consumer protection.
The Consumer Policy Strategy for 2004-07 identified six priorities for strengthening
of consumer protection in Bulgaria. They were to: (1) complete the process of
harmonizing the consumer protection legislation, including consumer protection in crossfrontier payments, e-commerce and financial services; (2) create conditions for the
effective implementation and enforcement of legislation and to provide support to lawenforcement bodies; (3) improve the institutional structure for consumer protection and
10

its effectiveness; (4) provide assistance to non-government associations for consumer
protection, in order to involve them more actively in the process of setting up policy and
its implementation; (5) ensure a stronger representation of consumer associations in
collective decision-making bodies; and (6) improve consumer access to justice. In 2007
and 2008 new legislations related to financial consumer protection were enacted.
However, in 2008 the Ministry of Economy and Energyâ&#x20AC;&#x2122;s Consumer Protection
Directorate was inactive in terms of policy initiation in the field of consumer protection.
In addition, the National Consumer Protection Council did not meet even once in the past
year, although its Statute (in force since June 10, 2006) requires a meeting every four
months. In 2009, the Ministry of Economy and Energy is expected to develop the
Consumer Policy Strategy for 2010-13.
The October 2008 Eurobarometer survey of the 27 EU Member States suggests that
Bulgarian consumers need a strengthened consumer protection framework for all
sectors, including financial services.11 The Eurobarometer survey was requested by DG
SANCO to look at consumer protection in all sectors (including financial services).
Among the EU, more consumers in Bulgaria felt that they were inadequately protected on
consumer protection than in any other Member State. Two-thirds (64 percent) of
Bulgarian consumers disagreed that they were adequately protected by existing measures
to protect consumers, while among the EU just over one-third (39 percent) were similarly
critical. Moreover, Bulgarian consumers were reluctant to rely on either government or
non-government organizations (NGOs) to protect their interests. Only 27 percent in
Bulgaria trust public authorities to protect their interests (vs. 54 percent average among
the EU.) Still fewer would rely on consumer associations to help them. Only 22 percent
of Bulgarians trust independent consumer organizations to protect their consumer rights
(vs. 64 percent among the EU). Furthermore, the conciliation committees have not yet
become an effective method of recourse for Bulgarian consumers. Only 12 percent
thought that it was easy to resolve disputes using arbitration, mediation or conciliation
bodies (vs. 39 percent among the EU.) When trying to decide what to do when a
complaint was not satisfactorily resolved, 22 percent of Bulgarian consumers (but only
14 percent in the EU) went to a consumer association or consumer help desk for
assistance. However more than three-quarters gave up. 78 percent of dissatisfied
consumers in Bulgaria took no further action (vs. only 51 percent among the EU).
Regarding general consumer protection in goods and services, Bulgarian consumers
are primarily interested in having strong laws to protect their interests. When asked
how best to protect consumers, the Eurobarometer survey found that the largest number
of Bulgarian consumers (45 percent) preferred the legal right to terminate a contract or
asking for a price reduction or repair of the goods. Tied for the second best ways (for 43
percent of Bulgarians) were the legal obligations of providers to ensure safe goods and
services and not to mislead or deceive consumers. Only one-third chose disclosure as
their favorite form of consumer protection. Just 34 percent thought that clear written
information about the goods or services and the sales contract was the best way to protect
consumers.
11

European Commission, Special Eurobarometer No. 298, Consumer protection in the internal market,
October 2008.
13

While the Eurobarometer survey provides useful insights, a survey focused on
consumer protection in financial services is needed. Due to their specialized nature,
financial services constitute a unique set of issues related to consumer protection. A
specialized survey on consumer behavior and attitudes regarding financial services would
be helpful in designing targeted policy measures to strengthen financial consumer
protection. Such a survey could be part of a survey on financial capability, as proposed
below.

Background on Bulgarian Household Finances
The financial indebtedness of Bulgarian households—and the maturity of household
loans12 rose from 2003 to 2007. Consumer debt increased almost six-fold from 2003 to
2007 as household borrowings rose from 7 percent of GDP in 2003 to 24 percent in 2007.
Loans for house purchases gained an increased share in the portfolio of loans to
households and non-profit institutions serving households (henceforth household loans),
thereby increasing the maturity of the portfolio. Since December 2003, the percentage of
loans with maturities of between one and five years has been decreasing (from 65 percent
of total household loans to 11 percent by end-2008) while loans with maturity above five
years have been increasing proportionately and stood at 74 percent by the end of 2008
(see Figure 1).
Figure 1: Household Loans by Purpose and Maturity
Shares of Household Loans by Purpose

Shares of Household Loans by Maturity

80%

80%

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%
0%

0%
Dec
02

Dec
03

Dec
04

Dec
05

Dec
06

Dec
07

Overdraft

Consumer loans

Loans for house purchase

Other loans

Dec
02

Dec
08

Dec
03

Dec
04

Dec
05

Dec
06

Dec
07

Dec
08

Loans with maturity up to 1 year
Loans with maturity over 1 up to 5 years
Loans with maturity over 5 years

Source: BNB.

Households have increasingly borrowed in foreign exchange, although almost
entirely in Euros. Household loans in foreign currencies (primarily Euros) rose from 7
percent at the end of 2002 to 29 percent by end-2008 (see Figure 2). Lower borrowing
interest rates in Euros relative to Levs, in combination with Bulgaria’s currency board
regime (foreign exchange rate of Lev pegged to the Euro) has encouraged Bulgarian
consumers to borrow in Euros rather than borrow in the local currency.
12

The data on household loans used in this section correspond to the statistics on “loans to households and
non-profit institutions serving households” granted by “other monetary financial institutions” as published
in the English version of the Bulgarian National Bank’s Monetary Statistics of December 2008.
14

Delinquencies in household loans were rising but stabilized in 2007. Bad and
restructured household loans have increased from 1 percent of total household loans in
December 2004 to 3 percent by the end of 2008 (see Figure 3). The highest percentage of
bad and restructured loans appeared during 2004 and 2006 in the segment of â&#x20AC;&#x153;other
loans". Loans made by non-bank credit institutions have shown higher delinquencies than
those originated by commercial banks (10 percent of total household loans vs. 4 percent).
Despite the share of bad and restructured loans in foreign currency (household loans
increased by mid-2006), it is relatively low and stabilized in 2007.
Figure 3: Shares of Bad and Restructured Loans in Household Loan Portfolios
6%
5%
4%
3%
2%
1%
0%
Dec
02

Dec
03

Dec
04

Dec
05

Total household loans
Consumer loans
Other loans

Dec
06

Dec
07

Dec
08

Foreign currency household loans
Loans for house purchase

Source: BNB.

Householdsâ&#x20AC;&#x2122; savings are dominated by term deposits in Euros. Term deposits
represent 64 percent of total household deposits in the banking system, while deposits
with maturities of up to three months account for 20 percent, and overnight deposits for
16 percent. 46 percent of household deposits are in Euros, while only 28 percent of

Bulgarians are increasing their use of banking products. A survey conducted in
September 2008 by the market research institute, GfK Bulgaria, found that one-third of
Bulgarian consumers hold a debit card while about 9 percent have credit cards (see Table
2). The use of bank cards has significantly increased relative to January 2005, when GfK
Bulgaria showed that only 20 percent held debit cards and 2 percent used credit cards.
Saving products appear to be less widespread than bank cards since only 12 percent own
a saving product of one form or another. Fewer than 3 percent invest in pension or
investment funds and less than 1 percent in insurance policies. According to the World
Bankâ&#x20AC;&#x2122;s survey on access to finance Bulgaria is ranked at number 40 among 157
countries, with 56 percent of its population having access to an account with a financial
intermediary (approximately 74 out of 1,000 people have an account related to a credit
product and there are approximately 1,300 deposit accounts per 1,000 people).14 In order
for the financial sector to play efficiently its role of financial intermediation and
provision of credit for businesses and households, further deepening in the use of
financial services will be needed.
Table 2: Household Use of Financial Services by 2008
Financial Service
Debit Card
Credit Card
Saving Products
Pension Insurance, Investment Funds
Insurance Products
Source: GfK (2008).

13
14

Survey Respondents
33%
9%
12%
under 3%
under 1%

Household borrowings include borrowings from non-profit institutions serving households.
See World Bank, Finance for All? Policies and Pitfalls in Expanding Access, 2008.
16

Key Findings & Recommendations
The years of 2006-07 witnessed a flurry of new legislation related to consumer
protection in financial services in Bulgaria. In particular, the revisions to the Consumer
Protection Act transposed many of the key EU Directives related to financial consumer
protection. In this period the Directives on Consumer Credit, Distance Selling and Unfair
Commercial Practices were also transposed into Bulgarian law. At the same time,
changes to the securities legislation incorporated the Directive on Markets in Financial
Instruments (MiFID) while revisions to insurance legislation transposed the Directives on
Life Insurance and Insurance Mediation. In March 2009, the Payment Services Directive
was transposed into Bulgarian law. All have substantially and substantively strengthened
the rights of consumers regarding the purchase of financial services in Bulgaria.
Importantly, the Consumer Protection Act states that where the provisions of any two
laws are in conflict, the provisions of the law providing a higher degree of consumer
protection shall apply. The revised legislation brought Bulgaria's consumer protection
legislation into compliance with those applicable for all EU Member States. While some
Directives, such as the April 2008 revised Directive on Consumer Credit provides for a
two-year period for transposition into national law, the Bulgarian authorities have already
planned its incorporation into local legislation.
More legislative revisions for supervision of the financial sector have recently been
approved. The amendments to the Law on Credit Institutions were enacted by the
Parliament on 31 March 2009. The revised Law brings leasing and consumer finance
companies under supervision of the BNB. Non-deposit taking institutions would not be
subject to the full panoply of prudential supervision but they would be obliged to register
with the BNB. Over time, non-bank credit institutions may also be subject to some form
of market conduct regulation and supervision related to business practices (but not capital
solvency levels). Ensuring that financial institutions are supervised by a financial
supervisory agency will help limit possible abuses in treatment of financial consumers in
Bulgaria.
Other institutional changes are also underway in data-bases of credit information.
The Central Credit Register held by the BNB has been expanded to include not only
outstanding consumer and mortgage loans by banks, but all credits granted by all
providers, including non-bank financial institutions that provide credit to retail customers.
In addition, the Central Credit Register is to maintain information on credit histories of
individual physical persons and legal entities, covering not only negative information
where payments have been missed, but also positive information where payments have
been made on time even for repaid debts. Such changes are welcome.
Nevertheless consumers complain about the practices of financial institutions.
Statistics on complaints are not published for all parts of the financial sector. The FSC
provides some detail on the number of complaints and the nature of the complaint but
similar information is not publicly available for consumers of banking services or
consumer credit. However, the financial guide Moite Pari (www.moitepari.bg) provides

17

some anecdotal information. It notes that consumers have complained that: (1) financial
institutions can change their lending or deposit rates without notice to customers and
without clear explanation of the changes; (2) important details of the terms and
conditions of financial products are contained in contracts that are difficult for consumers
to understand; (3) personnel of financial institutions are unable to explain to customers
their financial products; (4) consumers have difficulty obtaining information in a format
that allows them to compare offers by different institutions; (5) consumers do not receive
monthly statements from financial institutions; and (6) in case of disputes over entries in
credit register, consumers have difficulty obtaining correction of errors.
Clearer and more transparent rules—with effective enforcement mechanisms—are
needed to further strengthen the financial consumer protection framework and
practices. Clear rules help ensure that financial institutions throughout the financial
sector maintain high standards in treatment of their retail customers. At the same time,
clear rules help consumers understand their legal rights—and responsibilities—as
purchasers of financial services and products. Financial education will help consumers
understand their legal rights, but such rights must first be clearly articulated in laws,
regulations and codes of conduct.
While much improvement has been made in Bulgaria’s legal and regulatory
framework for financial consumer protection, some gaps remain. Such weaknesses
create loopholes and undermine the effectiveness of supervisory agencies in improving
consumer protection. For example, the rules on consumer disclosure for consumer credits
are extensive and determined by the Law on Consumer Credit (which was in turn based
on the recently revised EU Directive on Consumer Credit). By contrast, consumer
disclosure on residential mortgages (for which the EU Directive has not yet been
approved) remains minimal—even though consumer purchases of mortgages are
typically the single most important financial decision for households. Furthermore
consumer associations note that consumers are often unable to distinguish between a
mortgage loan versus a consumer loan with a mortgage used to pledge collateral.
Any reform program on financial consumer protection and education should be
both pragmatic and effective. The program should ideally require a combined effort of
the financial supervisory agencies, the consumer protection commission, consumer
associations and professional associations (taking into consideration the institutional and
political economy constraints in the country). The program should consist of practical
steps that set a path for continuous improvements in financial consumer protection. The
medium-term effectiveness of the program should be ensured via careful monitoring and
impact evaluation of any policy interventions so that adjustments and further refinements
are facilitated. The applied measures should be subject to a cost-benefit analysis to ensure
that the added value to the consumers (and ultimately to development of the financial
sector) corresponds to the investment of time and resources needed to implement a given
intervention. The program should be monitored and its successes (and its weaknesses)
evaluated so that further refinements can be made.

18

The program should empower consumers. The program should be evaluated in terms
of its ability to empower consumers—to give consumers information in a form that they
can easily understand, that allows them to compare offers by different service providers,
that ensures that they can find out the accurate costs of different products, and that they
know how to obtain more information and dispute an incorrect charge or credit.
As part of a program to improve financial consumer protection, five measures are
recommended:
1) Strengthen the institutional structure supporting financial consumer protection,
2) Improve the rules related to quality and user-friendliness of consumer disclosure,
3) Strengthen the rules that govern the business practices of financial institutions visà-vis consumers,
4) Improve the mechanisms to address consumer complaints and disputes, and
5) Expand the access of consumers to useful and timely financial education.

Institutional Structure
Under the Consumer Protection Act, the Ministry of Economy and Energy is the
main administrative body responsible for consumer protection in Bulgaria. The
Ministry is responsible for: (1) carrying out and coordinating state policy for consumer
protection, (2) taking measures to integrate consumer concerns into government policies,
(3) conducting the work of the National Consumer Protection Council, and (4)
coordinating the activities of the other administrative bodies having an impact on
consumer protection in Bulgaria.
National policy on consumer protection is developed by the National Consumer
Protection Council. The National Council was established in 1999. Its role is to advise
the Minister of Economy and Energy on issues related to consumer protection and to
develop the multi-year strategic plans for consumer protection. The National Council is
composed of government representatives and representatives of consumer associations.
To date, work of the National Council has been slow to start, with questions remaining on
sufficient participation by consumer advocacy organizations. There is also insufficient
coordination among government agencies responsible for financial consumer protection,
especially in terms of a coordinated strategic plan to evaluate the current level of
financial consumer protection (and financial capability) and development of ways of
improving both. However, development of the Consumer Policy Strategy for 2010-13
provides an opportunity to prepare a coordinated strategic plan to address the key issues
in consumer protection, including financial services. To be effective, the plan should be
reviewed by—and obtain the support of—key stakeholders, including not only
government agencies but also consumer advocacy organizations.
The primary body responsible for enforcing consumer protection legislation in
Bulgaria is the Consumer Protection Commission (CPC). The CPC was established in
1999 as a legal entity within the authority of the Ministry of Economy. Regarding
financial services, the CPC is responsible for enforcing the Law on Consumer Credit. The
CPC has strong authority. Under the Consumer Protection Act (article 165) the head of

19

the CPC has the right to issue individual administrative acts, penal decrees and impose
â&#x20AC;&#x153;forceful administrative measuresâ&#x20AC;?. Regarding consumer disputes, the role of the CPC is
limited to mediating disputes, primarily through its conciliation committees. The
proposals of the conciliation committees are non-binding on all parties, any of which may
refuse the proposal and go to court.
However, consumer protection in other parts of the financial sector is enforced by
other government agencies. For insurance, the FSC ensures the protection of policyholders (including retail policy-holders) under the Insurance Code. Indeed, policy-holder
protection is an explicit part of the FSC's mandate in the legislation. Similarly for
securities, investment funds and pension funds, the FSC is legally mandated to protect the
interests of investors. Consumer disputes on funds transfers can be presented to the
Conciliation Commission for Payment Disputes, which was established by the CPC.
However in the credit reporting system, it could appear less clear to which agency
consumers should present their complaints about financial institutions and other
companies (telecommunications, utilities etc.) that fail to correct errors in the data-base of
repayment history. Although, it would be desirable that the complaints be submitted to
the CPC, the Commission for Personal Data Protection could be seen as the relevant
authority for complaints since it regulates and supervises personal data protection.
Moreover, in cases where the law does not explicitly mention a competent authority, such
as residential mortgages and personal car leases that are not consumer credits, CPC is the
responsible authority for consumer protection. Such a complex structure makes it difficult
to enforce consistent consumer protection across all financial services in Bulgaria.
A clear institutional structure for consumer protection in financial services is
needed. Based on international experience, the preferred long-term recommendation is to
establish a financial ombudsman, which would clarify and consolidate the institutional
structure for financial consumer protection. Nevertheless, acknowledging Bulgariaâ&#x20AC;&#x2122;s
context, the Diagnostic Review recommends expanding the authority and capacity of the
CPC as an interim solution. If the authorities consider that these options are not currently
suitable for Bulgaria, another option outlines an alternative institutional framework for
financial consumer protection with strengthened roles for the financial supervisors and
the Commission for Personal Data Protection.
The approaches are presented below for consideration:
1) The CPC would be responsible for supervision of compliance with consumer
protection legislation for all financial services, not only consumer credits and
payments, but also mortgages as well as leasing, insurance, securities investments,
private pension plans and credit reporting;
2) The financial supervisory agencies would be responsible for supervision of
compliance with consumer protection legislation for financial services;
3) A financial ombudsman would be established to handle all disputes, complaints
and inquiries related to consumer financial services, eventually replacing the role
of the conciliation committees.

20

The approaches are not mutually exclusive. For example, a financial ombudsman could
complement the work of either the CPC or the financial supervisory agencies. The
advantages and challenges of each proposed option are discussed next.
Option 1 – CPC to Handle All Financial Consumer Protection
This option should require expanding the authority of the CPC to include all
financial products and services and not only consumer credit. The CPC would be
responsible for: (1) resolving financial consumers’ inquiries and complaints, (2)
reconciling disputes, (3) gathering, publishing and analyzing data on consumer
complaints, (4) submitting consolidated reports of consumer complaints and disputes to
financial supervisors, (5) recommending them to apply measures to improve consumer
protection, and (6) initiating and conducting other activities contributing to effective and
efficient financial consumer protection.
Expanding the authority of the CPC will require substantial building of CPC’s
institutional capacity. The CPC assumed the responsibility for consumer protection in
the field of consumer credit just recently, after the approval of the updated Law on
Consumer Credit (in force since October 2006) which followed the harmonization of the
Bulgarian legislation with the acquis. Consumer protection in non-financial products and
services require substantial resources and adding a highly complex area, such as the full
spectrum of retail financial services, would place a substantial burden on both the CPC
and its line ministry, the Ministry of Economy and Energy. To be successful, a detailed
capacity building plan will be needed, accompanied by the necessary funding from
budget resources and possibly donor funds.
Consideration should also be given to measures to build financial sector expertise
within the CPC. As a starting point, a specialized financial services department should
be created. Expert staff from the BNB and the FSC could be seconded to the CPC to help
develop the expertise of the financial services department. Attention could also be given
to the levels of salary needed to attract and retain experts in financial services. In
addition, conciliation committees should be established as permanent standing
committees for each type of financial service, and their structure and operation
mechanisms should be improved. In the medium-to long-term, the financial services
department should be detached from the CPC as a separate financial ombudsman office.
The CPC should also include in its Annual Report a summary of its activities regarding
financial consumer complaints as well as annual statistics on the number and nature of
financial complaints received, the types of products and the final results of the
complaints.
Option 2 – Supervisory Agencies to Handle All Financial Consumer
Protection
Under this option, financial consumer disputes should be resolved by the BNB, the
FSC and the Commission for Personal Data Protection. The supervisory functions of
the BNB and FSC should be extended to cover all institutions relevant for financial

21

consumer protection, and the legal mandate of the BNB should be revised to include the
additional responsibility of financial consumer protection.
Relying on the BNB and the FSC to resolve consumer disputes with financial
institutions could be challenging. The role of the FSC is to review consumer disputes to
see if the actions of the financial institution have violated the law and to determine if the
practice creates systemic risks for the financial sector. By contrast, the BNB views
consumer protection as an important element in building a strong and resilient financial
sector—but one that creates conflicts with its key mandate of ensuring financial stability.
In some cases, decisions that defend the interests of consumers will require compensation
from financial institutions. It could be argued that having the BNB rule in favor of the
consumer and require payment by the financial institution would—in the short-run—
harm the financial institution. However, over the long-term, a financial system needs a
strong level of public confidence to maintain soundness and stability and fair treatment of
its customers helps build that public support.
Strengthened coordination across the three agencies would be needed. Authorities
should meet regularly to share and analyze information on consumer disputes that may
reflect practices that create systemic risks, and to jointly address common issues on
consumer protection. This could be achieved by establishing a forum on financial
consumer protection. The supervisory agencies should also establish similar formats for
the collection, analysis and publication of complaint statistics of their sectors. The
statistics should be published on each agency’s website with the same frequency, and
there should be links to the other agencies responsible for consumer protection, in order
to facilitate the access to all complaints information by the consumers and consumer
associations.
Option 3 – Creation of a Financial Ombudsman
Under this option, the financial ombudsman should be the only out-of-court
institution responsible for consumer disputes for all financial products and services.
The office of the financial ombudsman would be responsible for: (1) resolving financial
consumers’ inquiries and complaints; (2) reconciling disputes; (3) gathering, publishing
and analyzing data on consumer complaints; (4) submitting consolidated reports of
consumer complaints and disputes to financial supervisors; (5) recommending them to
apply measures to improve consumer protection; and (6) initiating and conducting other
activities contributing to effective and efficient financial consumer protection.
Creation of a financial ombudsman is a time-consuming process—and one that will
need substantial institution-building—but it could have the most favorable longterm impact on financial consumer protection. A financial ombudsman provides a
useful out-of-court solution for retail financial services. Most consumer disputes involve
small amounts of money. A financial ombudsman can review cases and make quick
decisions. By taking fast decisions and operating fairly and transparently, a financial
ombudsman can build public confidence that consumer disputes can be resolved quickly
and transparently.

22

The EU experience on financial ombudsman shows that several models are available
but two are particularly effectiveâ&#x20AC;&#x201D;that of the independent statutory ombudsman (as
found in the United Kingdom and Ireland) and the ombudsman established by the
professional associations (as seen in the Ombudsman Scheme of the Private Commercial
Banks of Germany). The approach of the United Kingdom and Ireland requires the
establishment of a permanent office, set up by law and with funding from the government
budget and the industry. The German Ombudsman Scheme is set up by statute of the
Association of German Banks, operates under the auspices of the association, and
consists of five Ombudsmen who are generally retired judges. The decisions of the
Ombudsman Scheme are binding on the banks for amounts up to Euros 5,000 although
the consumer retains the right to appeal to the courts. Both structures are effective in
redressing the imbalance of power, information and resources between a consumer and
its financial institution. In the case of an ombudsman established by professional
association, attention should be paid to the presence of conflicts of interest. Since a
professional associationâ&#x20AC;&#x2122;s main goals are to develop its financial segment and protect the
rights and interests of its members (financial institutions), the associated ombudsman
may find it difficult to objectively fulfill functions related to protection of rights and
interests of consumers.
The establishment of a financial ombudsman in Bulgaria presents some challenges.
One difficulty is that, as is true of many civil law jurisdictions, the Bulgarian Constitution
restricts to the court system authority to make binding final legal decisions. However, the
German approach might be useful for Bulgaria, since it permits the creation of an
ombudsman by voluntary agreement of the professional association. The Association of
Banks in Bulgaria (ABB) has already conducted initial investigation of the approaches
used in the United Kingdom and Germany, but a comprehensive review by an interministerial task force (with participation of the professional associations and consumer
associations) may be needed.
There should be an evaluation of the costs and benefits for Bulgarian financial
institutions of the different approaches to financial ombudsman. Most post-transition
countries, including the new Member States of the European Union, are making efforts to
reduce the number of government structures and institutions. The creation of yet another
government institution may be perceived as an additional administrative burden for
private sector institutions that are the source of growth for the economy. However, an
institutional framework that does not operate effectively also introduces inefficiencies
that generate burden on the private sector. At the same time, consideration should be
given to the specific needs of Bulgarian consumers, particularly in light of the experience
of the financial crisis in 1996-97 and the context of an on-going global financial crisis
and its spillover to emerging market economies.
Role of Consumer Associations

Consumer associations have an important role to play in consumer protection in
Bulgaria. Under the Consumer Protection Act, consumer associations are to: (1) carry
out public programs including publications and information campaigns about consumer
rights, (2) bring collective actions to the courts to protect interests of consumers, and (3)
23

provide advice and information to consumers. The law specifies that for a consumer
association to be considered as sufficiently representative of all consumers, it must
maintain representative offices in at least one-third of the regional centers of the country,
and it must conduct effective actions for protection of consumer interests (producing and
disseminating publications on consumer protection, conducting campaigns to raise
consumersâ&#x20AC;&#x2122; awareness of their rights, or undertaking actions for protection of collective
interests of consumers). The representative consumer associations shall participate in the
National Consumer Protection Council, in the collective and advisory bodies for
consumer protection.
The participation of consumer associations in the financial sector should be
expanded to become strong advocates of financial consumers. Currently, the
associations lack sufficient staff, funding, reputation and technical expertise to act as
effective advocacy organizations regarding financial consumers. Bulgaria has 10
consumer associations that together received a total of about 75,000 Euro from the
Ministry of Economy and Energy to cover all their operations, including activities related
to financial services. This funding has been increased for 2009. However, additional
funding from the State budget needs to be provided to the consumer associations for them
to play an active role in financial consumer protection. While increased financing support
from the state budget is recommended, consumer associations should also increase their
transparency, improve their accountability frameworks and establish strong reporting
links to policy makers. Consumer associations should publish an annual report on their
activities regarding consumer protection, and conduct trend analysis of inquiries,
complaints and disputes submitted by consumers. Moreover, the functioning of the
National Consumer Protection Council as the main advisory body on consumer
protection policy strategy in Bulgaria needs to be revived and made effective.

Consumer Disclosure
At the foundation of effective financial consumer protection is consumer disclosure.
Financial institutions should be obliged to present their financial products in a clear and
comparable format, which is easy for consumers to understand and allows consumers to
compare offers from different financial institutions. Where consumers can obtain clear
and comparable information, they can make informed choices and ensure that the
financial products that they purchase are suitable for their needs and objectives. Clear
laws and regulationsâ&#x20AC;&#x201D;and effective enforcement mechanismâ&#x20AC;&#x201D;are needed to ensure
meaningful disclosure of consumer financial products.
The Bulgarian legislation requires clear information on key terms and conditions in
consumer credit contracts. The Law on Consumer Credit applies to loans between BGN
400 and 40,000 and requires detailed disclosure to the consumer. This must include: (1)
the principal of the credit; (2) the maximum amount of the credit, or the methods of
determining it; (3) the annual percentage rate (APR); (4) the conditions under which
charges may be amended; (5) the conditions for credit repayment by the consumer,
including the amount, number, frequency and dates of payments, as well as the total
amount of these payments, where possible; (6) other fees and charges outside the
calculation of the annual percentage rate of charge; (7) expenses related to the agreement

24

payable by the consumer; (8) a statement of the right of the consumer to repay the credit
before the due date and the conditions for termination of the agreement; (9) the required
security or collateral, its value, and the conditions under which it may be released; and
(10) the required insurance and related expenses when the choice of insurer is made by
the financial institution and not the consumer. In addition, the credit agreement must be
presented in clear and understandable language. These provisions are very useful but still
more could be done. The transposition of the revised EU Directive on Consumer Credit
into national law will be a further step to strengthen consumer protection in Bulgaria.
A Key Facts Statement for each type of standard retail financial product would help
consumers understand material conditions of their contracts. For financial products,
consumers need a short standardized description written in plain language that is
comparable across products provided by different institutions. A Key Facts Statement for
each type of financial product would provide such standardized information for
consumers. For example, for a consumer credit, the Key Facts Statement should provide a
summary in a page or two of all key terms and conditions. This would include not only
the items noted in the Law on Consumer Credit but also: (1) all feesâ&#x20AC;&#x201D;particularly
prepayment and overdue penalty feesâ&#x20AC;&#x201D;and any other charges that could potentially be
incurred; (2) any required deposits or advance payments; (3) if the interest rate is
variable, the basis on which the calculation is made, i.e. the base rate using a published
reference rate such as LIBOR or SOFIBOR (Sofia Interbank Offered Rate) plus a fixed
margin over the base rate; and (4) the contact information for submission of inquiries,
complaints and disputes. In particular, the Key Facts Statement should indicate the name
of the department (with telephone number and fax numbers and email address) where
inquiries, complaints and disputes can be submitted to the financial institution. If the
credit is used to finance a consumer product, such as a television or washing machine, the
consumer should be advised of the cash price of the product without financing charges.
For insurance, securities and pension products, an easily similarly readable and
comprehensible Key Facts Statement should appear at the front of all proposal and policy
documents. Special attention should be paid to credit card disclosures, where consumers
should be informed of the impact of paying only the minimum amount due. For the credit
reporting system, a brochure could explain to consumers the procedures for correcting
inaccurate information in the credit registers. The Key Facts Statements would not
replace the contract for legal purposes but each financial institution would be obliged to
ensure that their disclosures under the Key Facts Statements included no incorrect
material information.
Key Facts Statements should be provided for all classes of consumer financial
products, including insurance and pensions. Use of Key Facts Statements would make
it easier for consumers to compare offers by different service providers. Financial
consumers in Bulgaria can access websites such as www.moitepari.bg (Moite Pari) and
www.fincity.bg to review offers by different financial institutions. Requiring that all
financial institutions prepare their offers for commonly-used retail financial products in a
standardized format will further facilitate the ability of consumers to shop around and
compare offersâ&#x20AC;&#x201D;and thus ultimately increase transparency and competition in the
financial sector.

25

It is recommended that the professional associations develop standardized formats
for a Key Facts Statement for each type of standard retail product. The supervisory
agencies should also review and comment on the formats (for example, to ensure that
they provide material information that would not mislead consumers) but the preparation
of the formats would best be done by the respective professional associations. Thus, for
consumer credits, the ABB would develop a standard format that would allow banks to
efficiently prepare the Key Facts Statements, which would be reviewed by the BNB.
Non-bank credit providers might also comment on the format, although to date no
professional association of consumer finance companies or other form of non-bank credit
institutions has been put in place. It is also recommended that the professional
associations for insurance companies and pension management companies prepare Key
Facts Statements for their standard productsâ&#x20AC;&#x201D;and their formats should be reviewed by
the FSC. The Key Facts Statements should also be tested in order to ensure that the
average consumer understands their content and can use the information to make relevant
comparisons and decisions.
The disclosure requirements for consumer credits should also be applied to
residential mortgage loans. Households that take a BGN 500 consumer loan are
protected by the Law on Consumer Credit. However those who sign a BGN 50,000
mortgage on their home have no similar protection. Borrowing money for the purchase of
a house or apartment is often the single largest financial decision made by households,
and consumers should receive at least as much information on mortgage borrowings as
for consumer credits. This would include disclosure of the APR as well as preparation of
a Key Facts Statement. While the European Commission has not yet prepared a Directive
on mortgage credits, consideration should be given to the consumer disclosure needed on
mortgages for personal property.
Consumers should be able to obtain a copy of the full terms and conditions of retail
financial products without having to submit an application for a product. Access to
pre-contractual information is essential for informed decision-making. Consumers that
are considering entering into a contract with a financial service provider should have easy
access to the full set of contractual terms before they apply for the product. This will
allow them to familiarize themselves with the contractual terms without the pressure of a
salesperson looking to complete a sale. It also allows consumers to obtain the advice of
friends and family members, upon whom most consumers rely as a first source of advice
in post-transition countries. However, a study by the Bulgarian National Consumers
Association found that only about half of Bulgarian banks provide a copy of the full
consumer contract on their websites. Consumers who are considering buying an
insurance policy, be it life insurance or motor third-party liability (MTPL) can download
a copy of the full standard contract from the website of each insurance company.
Alternatively, they may visit the office of an insurance company and obtain the same
document. Similar access to the standard contract should be available for borrowers on
consumer credits or mortgages, unlike the practice today to submit to the consumer the
individual contract in the last minute with a limited possibility to review the general
terms and conditions. All the banks (and other financial institutions) should be obliged to
place the standard contracts in full on their websitesâ&#x20AC;&#x201D;and provide copies to any

26

consumers who visit their offices. The requirement could be set by regulation by the
supervisory agencies, or it could be part of a code of conduct set by the professional
associations. However, either supervisory agencies or consumer associations should
regularly monitor the easy availability of standard contracts of retail financial service
providers.
Consumer disclosure for private pensions should be improved. At a minimum, the
investment returns should be presented on a risk-adjusted basis, identifying the basic risk
parameters, such as the estimate of one standard deviation as a measure of the volatility
of the pension fund, among other parameters. Importantly, consumers need to be
informed that investment returns in the pension funds are not guaranteed and that
participants could lose principal at any time. One additional issue is that the FSC is still
developing the technical parameters for the payout phase and thus the amount of payouts
for annuities cannot be estimated. Participants should be informed that such work
remains to be completed.
Despite legislation and prohibitions in the ethical code, misleading advertising is not
uncommon. The Law on Protection of Competition includes extensive provisions
prohibiting the use of misleading and unauthorized comparative advertising in the
marketing of financial products. The Consumer Protection Act provides for the
prohibition of unfair commercial practices against consumers, including misleading
advertising. The Ethical Code of the Association of Banks also prohibits members from
engaging in misleading advertising. However consumer associations complain that
advertisements in the mass media continue to make unrealistic offers, including loans at
zero percent interest rates. For example, advertisements for a consumer loan often present
a low interest rate ("teaser rate") in large bold font, without clearly indicating that the
interest rate applies only for a limited amount of time or does not include the cost of
additional fees. The APR is included in the advertisement in much smaller font than the
nominal loan rate. For television commercials, the APR is displayed for a briefer period
of time than the teaser rate. The converse is true for deposit interest ratesâ&#x20AC;&#x201D;a high teaser
rate will be shown in large bold font, while the effective yield is shown in small font and
more briefly. Consumer associations reported that, even in bank branches, sales staff will
often emphasize the teaser rates and may fail to disclose the true effective interest rates.
Advertising for financial services should be closely monitored to ensure that it is not
misleading. As of December 2008, responsibility for enforcing the provisions on
misleading and comparative advertising of the Consumer Protection Act was transferred
to the Commission for the Protection of Competition. CPC has maintained responsibility
for enforcing the provisions on unfair business-to-consumer commercial practices. It
would be advisable for the authorities to monitor ongoing advertising practices for
consumer financial products to ensure that advertising for such products is not misleading
or unfair. In the case of private pensions, the FSC has established requirements for the
advertising and written information materials of pension insurance companies, and
compliance with them is closely monitored. The authorities should also enhance their
coordination to ensure consistent policies and enforcing actions in terms of advertising.
In some jurisdictions, such as Ireland, the financial legislation goes still further. The Irish

27

law requires that, in their print, television and radio advertising, financial institutions
indicate that they are regulated and by which financial supervisory agency. Such
obligatory disclosure would also be helpful in Bulgaria.
Tariff surveys showing comparison pricing of financial products would also be
helpful. Surveys of offered prices for standardized products could be conducted by the
professional associations or consumer advocacy associations. Alternatively, the
associations or the financial supervisors could set a format for disclosure and the
financial institutions could provide the data to the public. For private pensions, the FSC
has already published a comparative table regarding the fees charged by pension
insurance companies for the management of voluntary pension funds. In Ireland, for
example, tariff surveys conducted by the Financial Regulator have proved to be an
effective mechanism in encouraging consumers to engage in "comparison shopping"
before purchasing a financial product.

Business Practices
The codes of ethics (or conduct) prepared by the professional associations should be
widely disseminated and their implementation regularly monitored by professional
associations and the CPC. The ABB has developed a code of ethics for banks and
placed the code on the Association’s website. This is an important first step. However,
the distribution of the code of ethics is not broad enough. A search of banks’ websites
found that only one out of 12 banks that were researched had placed the code of ethics on
their websites. The Association’s code of ethics should be placed on the websites of each
of the banks that are members of the ABB. Furthermore, the code of ethics should be
available at each branch of the bank and should be given to all new customers of the
banks. Consideration could also be given to a simple consumer “bill of rights” (that
would include the section of the code of conduct dealing with customer relationships)
which could be visibly displayed on a wall in every bank branch. Similarly, the Bulgarian
Association of Supplementary Pension Security Companies (BASPSC) should ensure
that all its members comply with the code of ethics for pension insurance companies and
make it easily available for consumers. The Association of Bulgarian Insurers (ABI)
should implement its draft code of conduct and ensure that its members comply with it
and provide easy consumer access to it. Similar requirements should apply to investment
and insurance intermediaries. CPC could review whether the financial entity has
complied with its code of conduct. Cases of non-compliance with the codes of conduct
should be published on the website of the professional associations or the CPC.
All providers of consumer financial services should be obliged to be registered and
their business conduct should be subject to monitoring of a supervisory agency.
Currently, many financial service providers are not licensed or monitored by any
financial supervisory agency. The amendment of the Law on Credit Institutions enacted
in March 2009 assigns to the BNB responsibility for supervising all providers of
consumer credit, including leasing companies and consumer finance companies.
However other providers of retail financial services which are becoming more active as
the global financial crisis spills over to emerging market economies, such as debt

28

collection agencies and independent financial advisors, are exempt from monitoring by
any supervisory agency. With the recent amendments of the Law on Credit Institutions,
such financial service providers are at least required to register with either the FSC or the
BNB. Such financial service providers do not need to be subject to prudential
supervision, unless they have custody or control of client funds, but their market conduct
should be subject to surveillance by a supervisory agency. Professional associations can
also be delegated administrative, preparatory, or ancillary tasks related to the granting of
authorizations for financial service providers, but only the FSC, BNB or other relevant
governmental agency can grant, suspend or revoke their authorizations.
Debt collection practices should also be monitored. The increased use of debt
collection agencies by financial institutions may also warrant additional monitoring of
business practices. The law allows lenders to seize collateral to repay outstanding debts,
even if the collateral has not been specifically pledged to the lender. However, the
amount of the collection is limited to the size of the debt. Some consumer advocacy
organizations complain that in some cases, the proceeds of the sale of collateral exceed
the amount of the debt outstandingâ&#x20AC;&#x201D;and the owner retains the excess amount.
Attention should also be paid to financial intermediaries, such as brokers and
agents. Insurance and pension companies often employ agents to sell financial products
on their behalf. The insurance and pension companies should be liable for the actions of
their agents, particularly with regard to representations made on behalf of the insurance
or pension company. Consideration should be given to the publication of a list of
financial intermediaries that engage in miss-selling practices.
Consideration should also be given to the training and certification of all sellers of
financial services. In the securities sector, the FSC requires that investment
intermediaries be subject to periodic specialized training. For insurance products, the
FSC sets minimum training requirements and certifies individuals who sell insurance
products. A similar approach should be taken for private pensions. 15 In the banking
sector, it is the financial institution that determines the necessary training for those who
sell financial services to the public but it would be preferable if the ABB took an active
role in setting the curricula and minimum training requirements for sellers of banking
products. The nature of the training should depend on the product, and sellers of similar
products should be subject to similar training requirements. For simple financial products
such as a current account, a limited amount of training may be sufficient. For complex
products, such as financial derivatives, extensive training for sellers will be needed so
that those who sell and market such services are completely familiar with both the risks
and returns of the products. In addition, professional financial advisors are emerging as a
possible source of advice for retail consumers. As independent financial advisors become
active in Bulgaria, the financial supervisory agencies should consider what types of
training and certification will be needed. For this, the experience of other new Member
States of the EU may be helpful. Slovakia, for example, is putting together a three-tiered
program, where the training and certification for the first tier (for very simple products)
15

The FSC has proposed an amendment of the Social Insurance Code, which includes a provision obliging
pension insurance companies to train their agents.
29

would be set by the financial institution. Training and certification for more complex
products would be established by the professional associations and for the complex
sophisticated products, the financial supervisory agencies would set the curricula and
conduct the certification of both sellers of financial products and independent financial
advisors.
Procedures for account handling should be improved. Financial institutions should be
obliged to send monthly statements to consumers, unless the consumer requests that the
mailings be cancelled. Under Ordinance No. 3 on Funds Transfers and Payment Systems
(article 8) a bank must issue an account report for a specified period at the request of the
titleholder of the account. In practice, a number of banks in Bulgaria do not typically
send hardcopies of account statements to their customers. Instead, they prepare
hardcopies for the customers to pick up at the branch, make statements available online,
or email statements to the customer, depending on the request of the customer. Banks
should also be obliged to provide a minimum notice period (such as one year) when
inactive accounts are to be transferred to the state. Additional regulation is also needed in
areas such as handling (and particularly) closing of securities and investment fund
accounts. Banks should also be obliged to notify customers when fixed-term deposits are
maturing. Similarly regulations are needed to ensure that insurance companies notify
policy-holders in advance of renewals of insurance policies. In the securities sector,
regulations are needed regarding timely closing of customer accounts and prompt
payment (or transfer) of funds.
It may be useful to apply "cooling-off" periods to long-term consumer financial
products. Following the EU Directives, Bulgarian law establishes a 14-day cooling-off
period for consumer credit and any financial product sold by tele-marketing and away
from the premises of the financial service provider. However, cooling-off periods are a
valuable mechanism to protect consumers from high-pressure sales tactics, as are
sometimes used in the sale of insurance and pension products. The cooling-off provisions
allow consumers to rethink the purchase of financial products and review if a product
meets their needs and financial objectives. Although not part of EU Directives, coolingoff periods would be helpful for any products involved in a long-term financial decision,
such as the savings component of insurance and pension products. At the same time, the
presence of a cooling-off period creates some uncertainty for the financial service
provider and where changes in financial markets would affect retail pricing on financial
products, a penalty for the consumer who changes his/her mind after signing the contract
may be justified.
Consumers should be allowed to choose the provider of any product required for
another financial product. In many countries, banks require insurance policies when
granting a consumer loanâ&#x20AC;&#x201D;but then offer the consumer an insurance policy from the
company that is part of the same financial group. Consumers should be permitted to
choose any qualified provider of the service that is required for another financial product.
Banks should clearly provide customers with separate prices of each product in a bundle,
as well as any discount available if purchased as a bundle from the same bank (or from a
bankâ&#x20AC;&#x2122;s preferred vendor). Also, customers should be able to choose the provider of all

30

types of car insurance required for the purchase of an auto leasing product. It is a
common practice in Bulgaria that an auto dealer would only allow the consumer to
choose the provider of collision and comprehensive insuranceâ&#x20AC;&#x201D;the dealer would later
intermediate the liability insurance via its insurance broker, without letting the consumer
choose the liability insurance provider.
The credit reporting system could be strengthened. A comprehensive and up-to-date
credit register is at the core of an efficient consumer finance market, since the public
credit registry (and related private credit bureaus) provides the necessary data for credit
scoring. Even with well-tested methodologies, credit-scoring can only provide a rough
analysis of the credit-worthiness of individual consumers. Lenders should still conduct
their own analysis of a borrowerâ&#x20AC;&#x2122;s credit-worthiness but credit scoring can provide useful
insight to supplement that analysis. The recent changes in the legislation that require
credit bureaus to maintain positive information and permit non-bank credit institutions
access and provide information to the Central Credit Register are very helpful. In
addition, there should be a consumer awareness campaign that educates consumers on
their rights to obtain copies of their files in the credit register and encourages consumers
to check their credit histories and to submit a complaint to the relevant credit provider in
order to correct errors in the credit register. Financial institutions, especially banks,
should be more proactive in this regard and financial education programs should include
this important aspect of personal finance. Finally, credit bureaus should be encouraged to
develop credit scoring systems and to expand the credit reporting to utility companies
(telecom, electricity, gas, etc.) and be obliged to regularly advise consumers of their
personal credit scores.
Consideration might also be given to requiring that banks offer a low-cost minimum
bank account service. Bank accounts are considered to be "gateway" products that open
the door for consumers to use other forms of financial services. Providing a minimum
service and low-cost bank account can help deepen use of the financial sectorâ&#x20AC;&#x201D;and
provide a future expansion of the customer base for the financial system.
Use of a "mystery shopper" may also provide useful insights. Hiring an expert to pose
as an ordinary consumer of financial services and attempt to buy simple financial
products may help government agencies and consumer associations in understanding the
experience of typical financial consumers. This practice is reportedly being used by FSC
and could also be applied by other agencies and associations, and for various financial
products.

Inquiries, Complaints & Disputes
Treatment of consumer complaints and disputes lies at the heart of financial
consumer protection. Consumers need to have confidence that their concerns will be
addressed efficiently and in a fair and transparent manner. For financial services, which
are by their nature complex and difficult to understand, efficient resolution of customer
disputes is particularly important. Furthermore complaints and disputes (as well as simple
inquiries) provide an early warning signal for both the management and supervisory

31

boards of financial institutions, as well as for the supervisory agencies. When the same
type of complaint arises frequentlyâ&#x20AC;&#x201D;or a specific institution is the subject of numerous
disputesâ&#x20AC;&#x201D;financial supervisors are given valuable insights into the fissures of the
financial system (and which types of financial products or which institutions might be at
risk in the future).
The issue of redress for violation of consumer protection laws has gained increasing
importance within the European Commission. In a report prepared for the DirectorateGeneral for Health and Consumers of the EC (DG SANCO) in August 2008, Civic
Consulting noted the "significant" number of mass claims/issues in EU Member States.16
The report indicated that only a part of the claims/issues had been subject to a collective
redress proceeding, explaining that just a small portion of consumers of large-scale lowvalue claims ("scattered mass claims") take action and are compensated. The report also
noted that the financial sector had the largest number of reported mass claims/issues,
although in the United Kingdom the telecommunications sector also received a large
number of mass claims/issues.
In Bulgaria, about 1,200 complaints and disputes on financial services were
presented to the authorities in 2008. Even simple statistics on the number of complaints
and disputes submitted by financial consumers are difficult to compile in Bulgaria. The
BNB estimates that it annually receives about 100 complaints, of which about half are
thought to come from consumers. However, this does not include complaints that are
submitted directly to the banks. Nor does it include complaints related to non-bank credit
institutions. More precise detail is available for insurance and pensions. The FSC notes
that in 2008 it received 791 complaints on insurance products, compared to 398
complaints in 2007 and 565 complaints in 2006. For private pensions, the FSC saw 157
complaints in 2008 compared to 116 in 2007 (including two complaints that were signed
collectively by 21 people).17 Similarly, the CPC calculates that it received 159 complaints
about financial services in 2008. 59 of these complaints were related to the Law on
Consumer Credit (compared to 52 in 2007), 82 were submitted against banks regarding
issues not related to consumer credit, and 18 complaints were submitted against other
credit institutions and insurance providers. In 2008, the CPC also monitored 31 contracts
of banks, credit institutions and insurance providers for unequal clauses in their general
terms and conditions. This resulted in the detection of 40 examples of unequal clauses.
Less information is available about the number of consumer disputes on financial
services that are presented to the court system. However, one judge for the Sofia
Regional Court roughly estimates that each year she makes decisions on about 50 court
cases related to consumer financial services.
The rough estimate of about 1,200 disputes regarding financial services in Bulgaria
may underestimate the actual number of complaints. Where dispute resolution
services covering all parts of the financial sector are in place, such as in the United
16

Kingdom, the number of annual complaints is many times higher (see Table 3). Even for
a single area such as insurance, the number of complaints in France and Belgium reaches
over 3,000 annually.
Table 3: Number of Complaints Received by European Complaint Services in 2007
Complaint Service

Number of Complaints

UK Financial Ombudsman Service

116,600

Italian Banking Ombudsman

4,000

French Insurance Mediator

4,000

Belgian Insurance Ombudsman

3,400

Hellenic Ombudsman for Bankingâ&#x20AC;&#x201C;Investment Services

1,500

Consumer Complaints Scheme of the German Association of
Private Building Societies

650

Finnish Securities Complaint Board

250

Consumer Complaints Manager of the Malta Financial Services
Authority

250

Source: European Commission, Alternative Dispute Resolution in the Area of Financial Services,
Consultation Document, MARKT/H3/JS D(2008).

It would be best if the statistics on the number and types of consumer complaints
regarding financial services were published and analyzed. Publication of detailed
statistics, including the final result for each complaint, would provide an invaluable database upon which policy could be developed.18 In the absence of published statistics, it is
difficult to determine trends in problems with financial services. In addition, both the
CPC and consumer associations should be encouraged to analyze trends in consumer
complaints and recommend measures to address the issues. Both the CPC and consumer
associations have a valuable role to play in identifying the cause of common consumer
complaints and finding measures to prevent such problems from emerging. Financial
supervisors should analyze the reports on consumer complaints and look for systemic
risks that may thread financial sector stability.
All financial institutions should be obliged to establish a clear process by which
customers can submit disputes over transactions. Throughout the EU, most large
financial institutions maintain a separate department or unit (sometimes as part of the
public relations department) to officially receive complaints from dissatisfied customers.
Providing such provisions in the law would ensure that all financial institutions have such
designated persons responsible for reviewing customer disputes and complaints. The
Insurance Code requires that insurance companies establish internal mechanismsâ&#x20AC;&#x201D;and
that they inform consumers of the mechanism. Similar provisions apply to securities and
electronic payments. In addition, pension insurance companies are obliged to set up
boards of trustees to whom consumers can submit complaints. However, the legislation
for banking is not so prescriptive. The Code of Ethics of the ABB calls on member banks
18

Publication of statistics on disputes regarding financial services is also recommended by the European
Commission in its recommendation of March 30, 1998 on the principles applicable to the bodies
responsible for out-of-court settlement of customer disputes (98/257/EC).
33

to “(…) establish internal procedures or rules to process customers' claims”. These shall
include reasonable and the shortest possible deadlines for considering complaints and
replying the claimant. The bank shall ensure that all employees dealing with customers
are acquainted with the above internal procedures or rules.” In practice, most Bulgarian
banks have established such internal mechanisms but it is difficult for consumers to
identify the way in which they should present claims. It would be best if all contracts
with retail customers (and Key Facts Statements) provided the name and contact
information of the person or department to which complaints should be submitted.
However, for customers not satisfied with the resolution proposed by the financial
institution, the next step is difficult to identify. The Consumer Protection Act requires
that in case of violation of the rights provided under the Act, consumers and consumer
associations shall be entitled to submit alerts, complaints and petitions to the control
authorities performing consumer protection functions (article 178, paragraph 1). The state
bodies shall be obligated to register any consumer alerts, complaints and petitions
submitted and to institute proceedings for consideration of the said alerts, complaints and
petitions (article 179, paragraph 1). Customers with consumer credits are supposed to
complain to the CPC but some go to the BNB, which is not authorized to intervene in a
contractual dispute between a financial institution and its customer. According to the Law
on the Bulgarian National Bank (article 2) the primary objective of the BNB is to
maintain price stability through ensuring the stability of the national currency and
implementing monetary policy. In addition, the BNB is in charge of monitoring the
payment system, as well as regulating and supervising the banks, with the purpose of
ensuring the stability of the banking system and protecting depositors’ interests. The Law
on Consumer Credit also provides that BNB shall supervise the activities of banks and
“may” intervene and impose corrective measures if a bank violates the Law or
regulations, breaches its fiduciary duty, threatens depositors’ interests or conducts other
offenses. However, the Law does not “require” such intervention. By contrast, the
mandate of the FSC explicitly includes protection of consumers’ interest—and the FSC
has set up consumer protection departments in each of its sections for securities,
insurance and pensions. However, for both the BNB and the FSC, their role is limited.
The agencies check to see if a law or regulation has been violated. They ask the financial
institution to look into the complaint and respond to the financial supervisor regarding
their investigation. The supervisory agency may also use the occasion of the consumer
complaint to launch an on-site inspection to do its own review. However, in the final
analysis, no supervisory agency can take a binding decision as to what action a financial
institution should take in a particular consumer dispute.
A conciliation committee can also attempt to find an amicable solution. For cases that
are referred to the CPC, i.e. those relating to consumer credits and retail payments, the
CPC is authorized to create a conciliation committee that attempts to mediate a solution.
Under the Consumer Protection Act, the Minister of Economy and Energy shall establish
conciliation committees which shall assist in the resolution of consumer disputes (article
182). The Minister shall also establish the geographical area of competence of the
conciliation committees and approve a list of the members of the said committees who
shall assist for a consumer dispute settlement. Each committee shall include one
representative each of the CPC (designated by its Chairperson) a traders association and a
34

consumer association (article 183). The difficulty is that the conciliation committees
operate on the basis of an amicable settlement, acceptable to both parties. As described
by both consumer associations and local lawyers, the traders' associations have an
incentive not to present themselves on the hearing date. If one of the parties fails to
appear at the hearing, the conciliation committee is terminated and the case closed. Local
lawyers estimate that the average time for a case to be heard in court is five years (and
sometimes seven) even for simple cases. For the perspective of the financial institution,
the easy approach is not to participate in the conciliation committee and wait for the
consumer to take the institution into court. As per information from the CPC, there have
been only 13 ad-hoc conciliation committees related to financial services, established by
the CPC between 2006 and 2008. Out of these, only three have reached an agreement
between the two parties. The limited number of settled cases through out-of-course
mechanisms and the prolonged duration of court proceeding means that there is no
effective mechanism for dispute settlement in issues related to financial services, thus
limiting the conditions for fair, open, efficient and healthy financial market in Bulgaria.
The structure of conciliation committees should be improved. It is recommended that
permanent standing conciliation committees be established for each of the main types of
financial servicesâ&#x20AC;&#x201D;for credits (including mortgages) and banking products, for securities,
for insurance and for private pensions. The supervisory agency for each area could
propose chairman for the area, selecting individuals who are highly respected in each
field. The committees should also operate on the basis of written submissions, as does the
Conciliation Commission for Payment Disputes.
The structure of the Conciliation Commission for Payment Disputes provides a
useful approach. The Conciliation Commission for Payment Disputes is a specialized
committee, dealing with consumer issues on bank payments services, including electronic
services. By contrast with the other conciliation committees, the Payments Commission
enjoys a high level of respect in the financial sector. Several factors account for this. The
Payments Commission was established by the CPC but it is a standing permanent
committee, as opposed to the ad-hoc committees established for other consumer issues.
The Payments Commission operates on the basis of written arguments presented by both
parties, rather than requiring a hearing with both parties present in person. The Payments
Commission cannot give binding instructions to financial institutions but its decisions are
backed by a detailed reasoning and review of the law and the specifics of the dispute.
Furthermore, the Chairman of the Payments Commission is personally respected for his
expertise in financial issues, having retired from BNB as its General Counsel. In the first
three months after the Payments Commission was established in October 2005, the
Payments Commission was seized in three cases brought by individual consumers. In
2008, the Payments Commission reviewed over 100 cases and in 87 of the cases
agreement was reached. To ensure high effectiveness of the conciliation committees the
submitted disputes should be published (e.g. on a website) with a date and their status and
the decision of the commission added as the case is dealt with, decided on and closed.

35

Consideration should be given to various mechanisms of making the decisions of the
conciliation committees binding on financial institutions for small amounts of
money. Most consumer credits in Bulgaria are under BGN 6,000, and under BGN 3,000
when overdrafts are excluded. An upper limit of BGN 2,000 or 3,000 might be
appropriate. Such small amounts are generally not worth the time and resources of the
managerial time of financial institutions. The financial institutions would be better served
by having an outside party, such as a conciliation committee, review the details of each
case and make a decision based on the law and the facts of the case. Financial institutions
may be willing to accept binding decisions made by a respected third-party, where the
maximum amount of penalty is set at a relatively low level. 19 At the same time, the
presence of a standing conciliation committee will give confidence to financial
consumers that if there is a problem with a financial transaction, it can be quickly
resolved. An investment in strengthening consumer confidence may bring financial
institutions more consumer businessâ&#x20AC;&#x201D;and thus more than overset the cost of making
payments under decisions by conciliation committees.
The Consumer Protection Act and the recent changes to the Code for Civil
Procedures allow for class-action lawsuits by consumers but their effectiveness in
providing collective redress should be monitored. Under the Code for Civil Procedures
(chapter 33) and the Consumer Protection Act (chapter 9, section III) consumers and
consumer advocacy organizations can lodge a complaint on behalf of two or more
individuals in cases that affect collective interests of consumers. The legislation is
intended to provide a powerful method of collective legal redress for consumers,
including those of financial services, and is a useful first step. However, the specific
provisions may make it difficult for consumers (or consumer advocates) to use the law.
One issue is that four percent of the claimed amount must be paid as a court fee at the
beginning of the trial (according to article 4 of the Tariff for the State Fees collected by
the Courts under the Code for Civil Procedures, SG 50/2008 from 30 May 2008). While
court fees are useful in discouraging frivolous court cases, an inappropriately high fee
may also discourage consumers from presenting legitimate cases. The authorities may
therefore wish to monitor the use of the class action procedures to see if they provide an
effective form of collective redress for financial consumers. If the class action procedure
is not used, a reduction of the court fee should be evaluated in order to encourage the
effective use of the procedure by consumers.
It would also be helpful if Bulgaria were to join FIN-NET. FIN-NET provides a
network of alternative dispute schemes for countries throughout the EU. The network
allows consumers who purchase financial services in one EU member state easy access to
an out-of-court mechanism to resolve disputes in that member state. Once the alternative
dispute mechanisms are fully in place in Bulgaria, it would be useful if the CPC were to
join FIN-NET as Bulgariaâ&#x20AC;&#x2122;s representative in the network.

19

The EC Recommendation also notes that a decision taken by the body concerned may be binding on the
parties only if they are informed of its binding nature in advance and specifically accepted this (see
Commission Recommendations 98/257/CE and 2001/310/CE).
36

Financial Education
The importance of financial education for the financial sector is seen in the work of
the European Commission. The October 2008 Report of the European Parliament on
protecting the consumer noted that empowered and educated consumers help foster
competition, quality and innovation within the banking and financial services industries.
The Report further noted that educated and confident investors can provide additional
liquidity to capital markets for investment and growth. In addition, in the end of 2008 EU
Consumer Affairs Commissioner Meglena Kuneva launched DOLCETA
(www.dolceta.eu)—a website designed to help adults and children learn about basic
consumer issues. One of the four modules covers financial services (family budget, bank
account, consumer credit, mortgages, payment services, savings and investments).
Another covers basic consumer legal rights (contracts, labeling, distance selling,
advertising, redress). The DOLCETA modules have been translated into all EU
languages, including Bulgarian.
Bulgaria includes financial education as part of the consumer protection legislation
but consumer awareness remains low. In Bulgaria, the right to education on issues
related to consumer protection is part of the Consumer Protection Act. However, the
Consumer Policy Strategy for 2004-2007 noted that among the difficulties encountered in
the implementation of the national policy were a "low consumer culture" and a low level
of public awareness about the conciliation committees.
Some programs in Bulgaria are underway. The Ministry of Finance has conducted
one seminar in 2008 oriented towards businesses on changes in European legislation
related to financial services. The FSC maintains a several-week training program for high
school students interested in learning about the operations of the non-banking financial
sector. A limited number of newspapers also provide useful information for consumers.
The daily newspaper, Dnevnik, publishes reports on EU-wide financial education
initiatives, such as a recent report on the importance of financial education during the
current financial crisis, which included a discussion of practices in Austria and Sweden
and initiatives at the EU level. In addition, the national radio station, DARIK, has
interviewed the chairman of the Conciliation Commission for Payment Disputes about
fraudulent use of debit and credit cards. The Ministry of Education and Science also
conducts a training program in elementary and high schools with teaching materials on
personal finance translated from US consumer associations.
Preparing effective financial education programs is not an easy task. The experience
of industrialized countries over the last thirty years—and more recently in developing
countries—has identified lessons of “what works and what does not” in consumer
protection, and particularly in consumer information. By contrast, improving financial
capability is a long-term process and little is clearly understood as to what works (and
what does not) in improving financial capability, at least in the industrialized countries.20
20

For a summary of academic research on the limited effectiveness of financial education in the US, see
Shawn Cole and Gauri Kartini Shastry, If You Are So Smart, Why Aren’t You Rich? The Effects of
Education, Financial Literacy, and Cognitive Ability on Financial Market Participation, October 2007.
37

Techniques of delivering financial education have been well-tested in the US, Europe and
elsewhere over the last 30 years but their impact on levels of financial capability is still
unclear. Yet more unclear is the impact on consumer behavior.
A distinction should be made among three different types of programsâ&#x20AC;&#x201D;financial
education vs. information vs. advice. Financial education provides background
information for consumers so that they understand broad concepts such as that all
financial products have an inherent reward and risk level and that with higher reward
(lower cost) comes higher risk. It is a long-term investment in necessary life skills.
However, the technical issues of the impact of the compounding of interest (both as an
investment and as a debt) also should be taught and can be part of basic mathematical
training in schools. Financial education is generally considered to be formal training
through the school systems. However, informal training done in classrooms by
professional association or even supervisory agencies could also be valuable forms of
financial education. Consumer information relates to the details of financial products and
their terms and conditions. Consumer information should be provided by the sellers of
financial products. Alternatively NGOs (or in some countries, the government
supervisory agencies) could collect information from several financial institutions and
provide to the public product information on a comparable basis. However both financial
education and consumer information should be differentiated from financial advice.
Financial advice provides a consumer with recommendations on strategies for investment
and borrowings as well as recommendations on specific financial services or products.
Financial advice should be provided on a customer-by-customer basis and should be
tailored to the specific financial objectives and risk tolerance of a customer. Such advice
should be provided only by independent financial consultants, trained and licensed for the
type of financial products they advise on. Consideration should be given to the role of
non-profit financial advisors, which can help indebted people sort out their debts and
provide them with necessary counseling.
Financial education programs should be carefully designed, rigorously tested and
evaluated, and viewed as a long-term investment. Surveys of programs in OECD
countries show that additional research is needed to identify effective components of high
school training programs.21 It is very important to introduce a practice of evaluation of
the results of educational programs and identify the most efficient ones. Controlled trials
provide an effective mechanism of determining relative effectiveness of financial
education programs, using control groups as a basis for comparison. A set of most costeffective, complementary programs should be supported for implementation, subject to
existing budget constraints.

Other analysts go further and argue that financial education fails to improve consumer decision-making and
may even be harmful by developing consumer over-confidence. See Lauren E. Willis, "Against Financial
Literacy Education", University of Pennsylvania Law School, Public Law and Legal Theory Research
Paper Series, Research Paper No. 08-10. However, most analysts agree that both consumer protection and
financial education are needed.
21
For a summary of programs see Shaun Mundy, Financial Education Programmes in Schools,
Universities and Colleges: Analysis of Selected Current Programmes and Recommendations for Best
Practices, OECD Draft Report, forthcoming.
38

A baseline assessment of financial capability in Bulgaria would be helpful. The
survey should use the methods that have been successfully applied in other EU Member
States, such as the United Kingdom. The survey should be comprehensive and
segmented. It should be large enough to cover all key groups in Bulgaria, segmented by
geographic area, socio-economic level, gender, family status, household income, level of
formal education, profession and ethnic origin. Special consideration should also be
given regarding how low-income groups will be reached since collecting data from these
groups is notoriously difficult.22
Surveys provide an essential monitoring and evaluation tool of financial education
programs. Not all countries have conducted nation-wide literacy surveys. For example,
surveys have been conducted in Australia, Canada, France, Hungary, India, Ireland, the
Russian Federation and the United Kingdom, but neither in the United States (although
discussions are underway to conduct a national survey) nor in all EU Member States.
However, the surveys are a wise investment in measuring the effectiveness of financial
education programs.
The baseline financial capability survey should be used to identify vulnerable parts
of the Bulgarian population and design the financial education program. Using the
information in the survey, programs of financial education and consumer awareness can
be targeted to those who need the training and information the most. The survey can be
used by financial supervisory agencies and NGOs to identify and focus on the most
vulnerable to find the most effective ways of providing educationâ&#x20AC;&#x201D;whether through
class-room training, seminars or at the time they purchase a financial service ("point of
sale").
Follow-up surveys should be conducted every three to five years to evaluate the
effectiveness of the programs of financial education and consumer awareness. The
follow-up surveys can be used to determine to what extent the programs are effective and
what further modifications may be needed. Follow-up surveys should be conducted every
three to five years to see if the financial education programs are workingâ&#x20AC;&#x201D;and if they, or
the financial consumer protection framework, need further revision.

22

One informal approach would be to use a financial IQ quiz to test consumersâ&#x20AC;&#x2122; understanding of retail
financial services. The quiz could be administered through a consumer survey. An example of a financial
IQ test is given in Marianne A. Hilgert and Jeanne M. Hogarth, "Household Financial Management: The
Connection between Knowledge and Behavior" Federal Reserve Bulletin, July 2003. Available at
http://www.federalreserve.gov/pubs/bulletin/2003/0703lead.pdf.
39

Financial services consumer protection improves efficiency of financial intermediation and indirectly reduces risks to financial stability, which has been seriously challenged by the recent financial turmoil. The latest World Bank’s study entitled “BULGARIA: Diagnostic Review of Consumer Protection and Financial Capability” provides an in-depth review on the existing rules and practices in Bulgaria compared to international good practices on consumer protection in financial services.